Part 1. Assuming the consumer willingness-to-pay is uniform for bottled water, depict the price response functions for bottled water before the Flint water crisis and at the end of 2015 in the same figure. You may assume that the market size at the end of 2015 is larger for bottled water (as it should be the case). Moreover, you should indicate the retail prices for bottled water in the same figure. Indicate and label the prices in the figure. True values are not required. You must create a figure. One is not provided.
Part 2. Consumer surplus is an important measure of effectiveness of a pricing policy on consumer welfare, which is particularly indespensible for markets in crisis. Using the figure in part 1, identify three key areas contributing to the increase in consumer surplus and explain the key drivers corresponding to each of these areas.
Part 3. After January 2016, as a result of donations, the consumers could also get bottled water from donation/emergency centers. Explain if/how canabalization happens. Explain if/how arbitrage happens.
Part 4. According to local store managers, the retailers had not offered any price incentives such as quantity discounts to donors during the donation period. However, one may argue that offering discounted prices to donors could have helped struggling Flint residents indirectly and that would have been an ethical pricing strategy during the water crisis. Please discuss your thoughts on this pricing strategy in general, and explain why retailers may not be able to sustain such a humanitarian pricing strategy.